"The recession is placing the tax system under great stress and HMRC’s efforts to protect tax revenues and recover debt are being undermined by outdated systems.

"As the amount of tax collected drops steeply – in 2008-09, the tax take was some £22 billion lower than in the previous year - the protection of tax revenues has never been more important. But the trend in debt recovery is downwards.

"According to the latest estimate, no less than £11 billion of the nearly £28 billion of tax debt will probably not be collected. HMRC’s efforts to recover debt are being hampered by its systems which do not provide essential information such as a profile of debt across taxes.

"The money needed to upgrade systems would be well spent if it were outweighed by the amount of additional tax recovered.

"The picture on tax credit debt is also highly worrying. Since 2003, when tax credits were introduced, the Department has identified overpayments of £8.4 billion. By the end of March 2009, it had collected £2.7 billion of this debt and written off £1.3 billion.

"But of the £4.4 billion still to be collected, HMRC expects 53 per cent, or £2.3 billion, to remain uncollected. The department must decide by March 2010 exactly how much should be written off and be resolute in pursuing all the tax credits debt remaining on its books.

"Delays in introducing new systems have contributed towards backlogs in processing tax cases and have led to staff resources being diverted at critical times.

"The backlog of 17 million PAYE cases awaiting processing will not start to be cleared until the Department’s new systems are fully operational in April 2010.

"This and other backlogs must be cleared as swiftly as possible so that taxpayers know where they stand and what their liabilities are."

Mr Leigh was speaking as the Committee published its 2nd Report of this Session which, on the basis of evidence from HMRC, examined:

how it is managing tax and tax credit debt

what it is doing to clear a backlog of PAYE and Corporation Tax settlements

how it is tackling tax avoidance

how it is improving the administration of Stamp Duty Land Tax

how it is seeking to reduce tax credits error and fraud

HMRC (the Department) is the engine room of public spending, collecting the income that finances the majority of services provided by government.

In 2008–09, total taxes and duties collected and receivable were £436 billion, some £22 billion lower than in 2007–08. The £436 billion included £28 billion in tax debtors.

The Department has made a provision for bad and doubtful debts of £11.2 billion, 40 per cent of the total, and £3.3 billion more than in the previous year.

At a time when the public finances are under pressure, protecting tax revenues has never been more important. The recession presents a number of challenges for the Department and places the tax system under a great deal of stress.

Taxpayers looking for support have been given more time to pay their tax liabilities.

But while the Department is working to improve its debt recovery, its efforts are constrained by outdated systems and it has deferred plans to invest in them due to lack of funding. Better systems would help the Department improve tax recovery and reduce losses.

At the same time the Department has to ensure that it counters risks of non-compliance and deals with backlogs of processing from previous years.

Delays in introducing new systems have contributed to processing backlogs and have led to staff resources being diverted at critical times.

The Department cannot now begin to clear the backlog of 17 million PAYE cases until its new systems are fully operational in April 2010.

Delays in introducing new computer systems and the loss of expertise following office closures led the Department to divert staff away from work to test compliance with Stamp Duty Land Tax, increasing the risk of lost revenue from non-compliance.

The absence of information on tax losses through non-compliance and avoidance makes it harder for the Department to analyse risk and to judge how to deploy its resources where they will have most beneficial impact.

It has saved £11 billion in potential tax avoidance since 2005, but does not have an estimate of how much tax has been lost because of avoidance or of the cost of the resources it devotes to tackling avoidance.

In 2007–08 claimant error and fraud resulted in incorrect tax credits payments of between £1.58 billion and £1.84 billion, leading to the qualification of the Comptroller and Auditor General’s opinion on the regularity of tax credits expenditure.

The Department is looking to reduce claimant error by improving the guidance and support it gives to people at the time they need to report changes in their circumstances.

It has a target to reduce claimant error and fraud to not more than five per cent of the value of finalised awards by 2011.